Grandma's Jars

When times were tough during the depression and war years, every penny earned had to be carefully spent or saved. Those were the days when you paid your bills with notes and coins and thoughts of internet banking were pure science fiction. The irony is that while banking technology has revolutionised the way we pay for things, it has also made it easier for money management to get out of control. Grandma used to have a row of jars on the mantelpiece – one for rent, one for food, one for power and so on. Each payday, the housekeeping money was divided up between the jars so that there always enough to cover the bills and, with a bit of luck, some to set aside for a rainy day. The key to keeping control of your money is to use different accounts to manage each of spending and saving categories, just like Grandma’s jars on the mantelpiece.

The first step is do to a Money Plan which sets out how you plan to divide your income into savings for long term goals, savings for shorter term goals and spending on things that you need now. Your current spending should be divided into three parts: known expenses, other household expenses and personal expenses. Set aside the amount you want to save each payday for your goals.

For your retirement goal, joining KiwiSaver is a great way to start. For shorter term goals, such as holidays or things you want to buy for the house, set up a savings account that pays a high rate of interest and set up an automatic payment into that account each payday.

Now look at your known expenses. These are amounts of money that you are committed to paying and you will know exactly how much you have to pay and when. Examples of known expenses are rent or mortgage payments, insurance premiums, rates and debt repayments. Wherever possible you should arrange to have these amounts paid by direct debit or automatic payment from one account that is separate from your other accounts. By setting aside an amount each payday that will cover your known expenses, you won’t have to worry about them any more.

Next, set up an account for your personal spending; one for you and one for your partner if you have one. Transfer an amount each payday into those accounts and only spend what’s there. If you prefer, you can withdraw these amounts as cash each payday rather than setting up a separate account. It’s really important that you have access to money that is free to spend as you wish, but the amount needs to be kept within a reasonable limit and if you have a partner, it should be an agreed amount. Use this money to pay for coffees, lunches, nights out, clothes, haircuts, personal items and gifts. This sort of spending is the hardest to control and keeping it in a separate account or as cash means you won’t spend more than what you plan to.

The amount you have left is what will pay for your other household costs such as food, power, phone and petrol. Because you have separated out all your known expenses and personal expenses, managing this account becomes much easier. Once you have set up all your accounts, make sure you use the correct account whenever you pay for something so as to keep your spending under control. Then just watch your savings grow!

September 2008